I am Forbes' Opinion Editor. I am a Senior Fellow at the Manhattan Institute for Policy Research, and the author of How Medicaid Fails the Poor (Encounter, 2013). In 2012, I served as a health care policy advisor to Mitt Romney. To contact me, click here. To receive a weekly e-mail digest of articles from The Apothecary, sign up here, or you can subscribe to The Apothecary’s RSS feed or my Twitter feed. In addition to my Forbes blog, I write on health care, fiscal matters, finance, and other policy issues for National Review. My work has also appeared in National Affairs, USA Today, The Atlantic, and other publications. I've appeared on television, including on MSNBC, CNBC, HBO, Fox News, and Fox Business. For an archive of my writing prior to February 2011, please visit avikroy.net. Professionally, I'm the founder of Roy Healthcare Research, an investment and policy research firm. In this role, I serve as a paid advisor to health care investors and industry stakeholders. Previously, I worked as an analyst and portfolio manager at J.P. Morgan, Bain Capital, and other firms.

On the Fiscal Cliff, Republican Rebels are Right: No Deal is Better Than a Bad Deal

Last night, House Speaker John Boehner (R., Ohio) pulled his “Plan B” off the House floor because it lacked support from the House Republican caucus. The media is atwitter about Boehner’s failure to control his troops, because they believe that President Obama has gained a tactical victory from it. But as a policy matter, it’s far better that Republicans pass nothing, than pass a tax increase without any accompanying reform of our runaway spending on health-care entitlements. Indeed, despite all of the dramatic hyperbole about the “fiscal cliff,” it’s important to remember that going over the fiscal cliff will reduce the budget deficit by $503 billion in 2013, and $682 billion in 2014, relative to the “solutions” being bandied about on Capitol Hill. What’s so terrible about that?

First, let’s review the key components of what will happen in 2013 if Congress passes nothing this month.

Fiscal cliff component #1: Tax increases

The first aspect of the fiscal cliff is that taxes will go up. Income tax rates will revert back to the rates we had under President Clinton, leaving aside the additional $1.2 trillion in tax increases that Democrats passed under Obamacare. The top income tax rate will rise to 39.6 percent from 35 percent.

In addition, there are a number of other temporary tax provisions that will expire. Congress steps in every year to add an inflation adjustment to the Alternative Minimum Tax, because the AMT was not originally indexed to inflation. Without an inflation adjustment, more people will meet the income threshold for the AMT.

If Congress were to extend all of these temporary tax provisions except for the lower tax rates on individuals with incomes above $200,000, as President Obama has advocated, the deficit impact would still be steep: $288 billion in 2013, and $382 billion in 2014.

Fiscal cliff component #2: Spending cuts

The second aspect of the fiscal cliff is that, if we go over it, spending will go down. Temporary payroll tax holidays, which reduce the Social Security and Medicare payroll taxes paid by employed individuals, will expire. In addition, the “temporary” extension of unemployment benefits undertaken during the recession will finally end. Continuing those temporary tax holidays and temporary unemployment benefits will increase the deficit by $108 billion in 2013, and $150 billion in 2014.

Importantly, Medicare’s Sustainable Growth Rate will take effect, reducing Medicare’s payments to physicians by tens of billions of dollars. This provision, and a few others, will reduce federal spending by $40 billion in 2013, and $61 billion in 2014.

In addition, the Budget Control Act—the law passed last year during the epic debt-ceiling fight—automatically sequesters, or reduces, defense spending by $24 billion in 2013 and $51 billion in 2014.

Fiscal consolidation is inevitable; if not now, when?

Adding all of that up—and understanding that the payroll tax holiday more closely resembles economically impotent stimulus spending—kicking the can down the road comes at a steep fiscal cost. Now, I’m not in favor of going back to the Clinton tax rates. I believe that we should keep tax rates where they are, and reduce spending to get rid of our budget deficit. But President Obama has promised to veto any bill that does so. So what should responsible politicians do?

Remember that continuing to spend money we don’t have isn’t free. Deficit spending is a tax increase on our children and our grandchildren, and on people who have done the responsible thing and built up their savings. Going over the cliff means that the accounting gimmicks are over. No more “temporary” this and “temporary” that, so that Congress can pretend to be more fiscally responsible than it’s actually being. Going over the cliff means that a broad swath of Americans will be required to pay for the enlarged government that they voted for in November. I don’t think that’s such a bad thing.

Much of the Republican behavior on Capitol Hill has been driven by fear of how the electorate will view Republicans if they don’t continue to pass temporary tax cuts. But reducing the deficit will have to happen sometime, and whenever it happens, it is likely to have some negative impact on the economy. If Republicans don’t want to reduce the deficit two years away from the next election, under a Democratic President and a Democratic Senate, they’ll never reduce the deficit. The time to reduce the deficit is now, before a real fiscal crisis emerges, one that makes Greece look like a picnic.

By leaving town and letting America go over the fiscal cliff, Republicans don’t have to vote for tax hikes that they justly oppose. Economically counterproductive spending, like the unemployment benefit extension, will come to an end. And an enormous amount of irresponsible accounting gimmickry, like the annual wrangling over the Medicare “doc fix,” will end also.

And once Democrats gain their generational victory—returning to the Clinton-era tax rates—what case will they be able to make for even higher tax increases next year? Instead, the conversation will move back to what it always should have been about: the fact that the government spends too much taxpayer money, money it doesn’t have.

A responsible alternative to doing nothing

Now all of this is not to say that there wasn’t a better policy solution to be had. Raising Medicare’s retirement age is far preferable to drastically cutting physician reimbursements, and would save more money over the long term. Across-the-board defense cuts are far clumsier than letting the Secretary of Defense propose his own optimized version of the same amount of spending cuts. And Mitt Romney’s approach to tax reform—reducing loopholes and deductions in exchange for lower tax rates—would stimulate the economy and increase tax revenue.

Democrats have vowed to block such measures. But we can’t let the perfect be the enemy of the good. A package along these lines should have formed the basis for Speaker Boehner’s “Plan B,” instead of the politically expedient tax hike he actually proposed, one that his own caucus could never support.

The key for Republicans is to also do the right thing in 2013. Democrats will come back in 2013 and attempt to pass all of their spending priorities, along with the Bush tax cuts for everyone making less than $200,000, and dare Republicans to oppose them. But Republicans should indeed oppose them, unless those tax cuts are accompanied by serious entitlement reform.

President Obama has insisted that he would be happy to go over the fiscal cliff in order to ensure that the wealthy pay more in taxes. The responsible thing for Republicans to do is to let him.

UPDATE 1: On Twitter, Ryan Ellis, tax policy director at Grover Norquist’s Americans for Tax Reform, writes that I shouldn’t consider the payroll tax holiday to be a spending increase, because it’s really a tax cut. From an accounting standpoint, it’s hard to argue with him.

Elsewhere, Peter Suderman expresses skepticism about my cliffmanship. “After all,” he writes, this is “the same GOP that just voted against a strategic tax hike that wasn’t going to become law—despite the fact that it might have given them leverage to actually prevent real tax hikes from happening.” Erick Erickson, however, is on my side.

UPDATE 2: One point I should have mentioned in the article is that the U.S. already has the most progressive tax code in the developed world. Boehner’s “Plan B,” by raising taxes on millionaires but maintaining temporary tax holidays for everyone else, would worsen this problem. We’re never going to build consensus for entitlement reform if the burden of funding entitlements falls largely to 2 percent of the population.

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“It weakens the entire Republican Party, the Republican majority. It’s the continuing dumbing-down of the Republican Party and we are going to be seen more and more as a bunch of extremists that can’t even get a majority of our own people to support policies that we’re putting forward.”

– Rep. Steven LaTourette (R-OH), quoted by Roll Call, on the failure of House Speaker John Boehner’s “Plan B” to avoid the fiscal cliff.

Great job, Avik. I am sure Pete Peterson will give you a pat on the head, an attaboy and an extra cookie in your stocking. I don’t think you left out a single false premise, spurious analogy or invalid metaphor in this little screed. I especially like the old chestnut about protecting “our children and grandchildren” fro “our Debt.” What a crock! As if it is better tyo have them inherit a broken economy with mass unemployment and systemic underemployment, no social services, and a lapsed social compact with their own government. This BS about having to cut spending must stop!

We are in a very, very bad repression, in case you hadn’t noticed. The economy is barely sputtering, and jobs are not being created fast enough. Now is certainly NOT the time to suck billions and billions of dollars out of the economy. On the contrary, this is when Government needs to spend the most!

Everyone seems to be in agreement that the Debt/GDP ratio is important, but all the discussion seems to center on reducing the numerator rather than increasing the denominator. Have people forgotten how ratios work? We need the Government to step in as the “spender of last resort” and increase the GDP.

Obama is not bluffing! After all, he is in a win-win situation. If the Republicans had caved, he would get a piece of what he really wants, and would come back later for the rest. So any good faith negotiating on his part was his faith in his vision of a socialist State, not in trying to avoid the fiscal cliff. And if he takes us over the cliff, he gets almost everything he wants; much higher taxes and no reform of entitlements or other serious cuts in spending. He will prove this by not making any serious attempt for an 11th hour deal, since he wants all that tax money! But his negotiating ploy may have backfired; it is increasingly obvious what his real goal is, and people are starting to notice. No 11th hour deal will prove that he wants to go over the cliff, and has all along.

Don’t get caught up in the ‘legacy’ BS; his legacy, the one he really wants, will be super-sized government and a high tax socialist regime, and they will be the ones who write the history.

It’s difficult to read articles like this (and other with a more ‘liberal’ slant) and not think, “This is exactly what is wrong in this country. This my way or the highway mentality.” There was a sane way forward two years ago, Simpson Bowel, it was rejected by both sides.

I’m starting to think Obama is the most cagey politician on the hill these days. He can’t get “extreme” left to agree to deep spending cuts and reforms in entitlements and the right won’t budge on taxes or defense spending. Looks to me that the best way to bring both sides running to the table is to let the cliff jump happen. Everyone loses while getting what they wanted in the first place.

Unfortunately, the Republicans have made several moves that have blown up in their faces. We go over the cliff, voters start seeing the effect in their paychecks and it isn’t a bi-partisan reaction we’re going to see. We’re going to see blame places squarely on the shoulders of the Republicans whether its entirely deserved or not. The Republican record over the last several years, in addition to their actions during and after the election, and now with the fiscal cliff has not inspired confidence with the American public and is likely to cost them in 2014 barring any catastrophe. We’ll have to see how they handle the upcoming negotiations to mitigate the damage wrought by the cliff.

If they come to the table with their current attitude and try to hold the nation hostage again during the upcoming debt ceiling debate, the Republican party as we know it is done.

Washington has a spending problem and both parties are to blame. One of the few things the feds are supposed to do Constitutionally is provide for defense. It is less than 20% of the budget while social programs are over 50%. Where in the heck is a sanity check? Cut spending and the big entitlement programs are going to have to take a 500b dollar hit. It’s the same percentage of spending they account for in relationship to the annual deficit. You can reduce that somewhat but only by raising taxes on the middle class. It’s where all the real money is.

The Defense Bill passed by the house was for 633 billion and 88 billion of hat is for drawing/down supporting the Afgan war. Presumably, since we are withdrawing, this is one of the lest expensive ten budgets for this war. Many of the budget items added by a Congress beholden to the defense industry for campaign contributions were criticized by Leon Panetta. I guess the main issue is the role of government: is the government’s role to help people or kill people? Without the trillion spent in Afganisatan, plus the likely trillion spent in Iraq, the cost of making health care accessible to our citiznes is miniscule. If our Congress had not been raiding the Social Security Insurance fund by borrowing from it for every kind of spending there is, this discussion would be moot.